The Institute of Management Accountants (IMA) is launching a research effort to find out how peer professions assess accountants’ effectiveness in providing cost information that supports internal decision-making by managers and supervisors throughout organizations. Manufacturing has long been the focus of the accounting profession’s most extensive costing practice, so your assessment is the most vital. Please take a few minutes to take the short anonymous Management Accounting Effectiveness Survey.
When the IMA gets enough data, I’ll report the results in this column. This survey is not an exercise to promote the accounting profession. It is an effort to confirm, better define and solve a problem many believe exists. The following paragraphs are slightly adapted for manufacturing from the core documents of the task force organizing the research. Take the survey; let us know where you stand.
Although the past 50 years have seen the manufacturing environment and business practices change radically, the managerial costing practices most 21st century organizations use are little different than those of the 1950s. Practicing accountants have focused their attention almost exclusively on financial accounting issues, measuring the value others have created and presenting it to capital markets—while ignoring their responsibility to provide relevant and actionable internal managerial costing information to help operating managers and supervisors make better value-creating decisions every day.
Most costing systems used today were designed to support their organizations’ external financial reporting, not to provide quality internal decision support information. They are simple, minimalist models that comply with accounting rules; they are not valid economic models that provide deep internal business insights, connect clearly with operational information, or enhance the quality of a manufacturing manager’s decisions.
The accuracy of information generated by financial accounting-focused systems is limited to organization-wide measurements and breaks down completely at even basic levels of granularity. This type of information makes many profitable business improvements and opportunities look bad, and many unprofitable ones look good. It misstates or fails to report profitability by product, service line, channel and customer.
The utility of information generated by financial accounting-focused systems is also severely limited. The information fails to adequately measure the cost of critical resources and processes. It assumes general ledger cost data—with all their short-term aberrations—are valid economic costs. It fails to link costs with causal factors, resulting in unrealistic budgets and forecasts as well as ill-informed insourcing, outsourcing, offshoring, capital spending and other critical management decisions.
This ongoing use of mid-20th century management accounting practices well into the 21st century is not due to the absence of new, more appropriate practices. Since the 1980s, management accounting thought leaders have been developing new, more effective practices, and modifying old practices to meet the needs of organizations competing in a modern, global and highly competitive marketplace. Most practicing accountants have, however, chosen to ignore these new concepts and perpetuate the costing practices of their grandfathers focused on financial reporting to external users.
Progressive managerial costing practices are needed to reflect the underlying managerial economics in manufacturing. The accounting profession has fallen far behind manufacturing, manufacturing enterprise solutions, other business disciplines, and their systems in its ability to generate causal, real-time and action-oriented financial information. This isn’t a problem of technology, and it isn’t a problem that Big Data can solve. Accounting professionals need a change in mindset to begin to design, collect and create the information that will make them effective business partners to their organizations. They also need input from other areas of the business to help them know how and why to change. Please take a few minutes and complete this important survey.
>>Larry White, CMA, CFM, CPA, CGFM, firstname.lastname@example.org, is executive director of the Resource Consumption Accounting Institute (www.rcainstitute.org), which trains and advocates for improved cost information connecting operations to business performance.